While artificial intelligence (AI) is the undeniable innovation that has driven all three major Wall Street stock indexes to record highs, the euphoria over stock splits in 2024 is likely to be just as important.
A stock split allows publicly traded companies to superficially adjust their share price and the number of outstanding shares by the same factor. These changes are cosmetic in the sense that they do not affect a company’s market capitalization or operating performance.
Splits come in two varieties, with investors leaning much more toward one than the other. On the one hand, there are reverse stock splits, which are aimed at increasing a company’s stock price. Reverse splits are often done to ensure that a company’s stock meets minimum listing standards on a major stock exchange.
On the other hand, forward stock splits are used to reduce the nominal stock price of a publicly traded company. Since forward splits are almost universally executed by companies that outperform their competitors in innovation and execution, this is the type of stock split that most investors gravitate toward.
In the past six months, 13 brand-name companies have announced or completed stock splits, 12 of which were forward splits. However, you may be surprised to learn that the stocks Warren Buffett can’t stop buying are Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) –apart from shares in his own company and oil and gas giant Occidental petroleum — is the only one of the 13 to have announced a reverse split.
The Oracle of Omaha is a big seller of shares for almost two years
Before we dive into the unique stock split Buffett bought en masse for Berkshire Hathaway, some context is needed.
While the Oracle of Omaha is known for his long-term investing approach and has stated on several occasions that he would not “bet against America,” what he and his key investment advisors do over shorter periods of time does not always match what he preaches in Berkshire’s annual letter to shareholders and at his company’s annual meetings.
In each of the last seven quarters, Buffett and his team have been big net sellers of stocks.
All told, Berkshire’s smartest investing minds sold $131.6 billion more in stocks than they bought collectively between Oct. 1, 2022, and June 30, 2024. Buffett sold more than $3.8 billion worth of stocks Bank of America It appears Berkshire’s investment team is on track to post its eighth consecutive quarter of net sales activity.
While Warren Buffett has occasionally hit the buy button, he and his team terribly been selective about their purchases for nearly two years. This makes his entry into a popular company that is doing a reverse stock split all the more intriguing.
Meet the Stocks Warren Buffett Invests in as a Legal Monopoly Stock Split
While Buffett bought shares of seven stocks in the second quarter, including opening new positions in Ulta Beauty And HEICOit is the approximately 96.2 million additional shares of satellite radio operator Sirius XM Holdings (NASDAQ: SIRI) that’s the eye-popper. This increased Berkshire’s stake in Sirius XM by 262% from the previous quarter.
As I mentioned earlier, most reverse splits are designed to keep a company’s stock listed on a major stock exchange. But Sirius XM is not in danger of being delisted, making it unique among companies that do reverse stock splits.
By the end of the third quarter, Sirius XM should have completed the merger with Liberty Media’s Sirius XM tracking stock. Liberty Sirius XM Group (NASDAQ: LSXMA)(NASDAQ: LSXMB)(NASDAQ: LSXMK)which will create a single class of outstanding shares. But with Sirius XM already having so many shares outstanding (approximately 3.85 billion), the board of directors announced a 1-for-10 reverse split that will be implemented upon completion of the merger. In other words, this is not a stock split being implemented out of weakness, which is typically seen with reverse splits.
Aside from the arbitrage opportunities that may exist between Sirius XM stock and Liberty Sirius XM Group, there are quite a few competitive advantages that would make Sirius XM attractive to Warren Buffett and his chief investment advisors, Ted Weschler and Todd Combs.
Let’s start with the obvious: Sirius XM is the only licensed satellite radio operator. To be clear, that doesn’t mean it doesn’t have any competition. Sirius XM competes for listeners, just like terrestrial and online radio providers. But as the only legal monopoly on satellite radio services, it gives the company exceptional leverage over subscription pricing, which it uses to stay ahead of the inflation curve.
Another key difference between Sirius XM and traditional radio operators is how the two generate revenue. Most terrestrial and online radio providers generate almost all of their revenue from advertising. This approach works great until an economic downturn or recession hits. Companies aren’t shy about cutting back on their marketing budgets at the first sign of trouble.
In the first half of 2024, less than 20% of Sirius XM’s revenue came from advertising (via Pandora). By comparison, nearly 77% of net revenue came from subscriptions. Subscribers are significantly less likely to cancel their service during economic downturns than companies are to significantly cut advertising budgets. In short, Sirius XM’s cash flow is generally much more predictable than that of terrestrial and online radio providers.
Sirius XM’s cost structure is also more predictable than its peers. While there are certain expenses that will ebb and flow on a quarterly basis, such as royalties, transmission and equipment costs are generally relatively fixed, regardless of how many subscribers Sirius XM has on its platform.
The final piece of the puzzle is that Sirius XM stock is historically cheap against the backdrop of a terribly expensive stock market. Shares could easily have been bought in the June quarter for less than 8 times next year’s earnings — a level Sirius XM has not traded at in its 30 years as a public company. The icing on the cake is the company’s 3.7% dividend yield.
Warren Buffett always finds a way to stand out. One way he does that is by buying Wall Street’s unique stock split.
Should You Invest $1,000 in Sirius XM Now?
Before you buy Sirius XM stock, here are some things to consider:
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America and Sirius XM. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, and Ulta Beauty. The Motley Fool recommends Heico and Occidental Petroleum. The Motley Fool has a disclosure policy.
Meet the Unique Stock Split Stock Warren Buffett More Than Tripled His Stake In, originally published by The Motley Fool
